Algorithmic Trading Vs High-frequency Trading: Understanding the Distinctions

The world of finance has undergone a sea change in the past few years. With the advancement of technology, the world of trading also has revolutionised. Initially, manual trading was the most popular mode. However, with the advent of technology, automated trading came into existence. Now, there is algorithmic trading as well as high-frequency trading, which is increasingly becoming popular among traders globally.

Both algo trading and high-frequency trading are terms often used interchangeably. However, there are differences in the two. Let us tell you all about it today.

Algorithmic Trading

A popular mode of trading nowadays is Algorithmic trading, also known as algo trading. Algorithmic trading is a method of executing trade orders by providing pre-defined conditions to computer software. The software executes trade orders on behalf of the traders when the conditions are fulfilled. The trade orders are executed very swiftly and accurately.

One of the most important aspects of algorithmic trading is coding the strategy into the computer program. Based on the coded strategy, the computer program executes trades. While algorithmic trading may require some coding knowledge, platforms like uTrade Algos offer traders without coding knowledge a chance to try their hand at it.

Characteristics of Algorithmic Trading

1. Algo trading encompasses a wide range of automated trading strategies, including both short-term and long-term approaches.

2. Algo trading can operate on various time frames, from minutes to days or even longer.

3. The main aim of algo trading is to optimise trading strategies, improve execution efficiency, and manage risk using pre-defined algorithms.

4. Algorithmic trading is faster than manual trading. Orders are executed swiftly and accurately.

High-Frequency Trading (HFT)

High-frequency trading is a subset of algorithmic trading. It is a type of algo trading characterised by extremely high speeds while executing a large number of trades in a short span of time and shorter investment horizons. High-frequency trading uses special computers to achieve the highest possible execution speeds. High-frequency trading is complex, and large institutional investors like investment banks and hedge funds use it.

Characteristics of High-Frequency Trading

1. HFT is a part of algorithmic trading. In it, trades are executed in large volumes and at very high speeds.

2. High-frequency trading takes place at very high speeds. Hence, it executes trades very swiftly, usually within milliseconds or microseconds.

3. The main objective of high-frequency trading is to take advantage of the price inefficiencies in the market in real time. Hence, it needs low latency and rapid execution.

4. It requires an extremely high speed of execution. Hence, it uses special computers to execute trades.

Difference between Algo Trading & High-Frequency Trading

	Algo Trading	High-Frequency Trading
Scope	Includes a wide range of automated trading strategies.	A subset of algo trading. Focused only on the execution of large volumes of trades in a short span of time.
Time	Can operate in different time frames, short to long.	Operates on a very short span of time frames, usually milliseconds or microseconds.
Speed	Trades are executed faster than manual or traditional trading.	Trades are executed at ultra-fast speeds by special computers.
Aim	Using pre-defined conditions, it aims to optimise trading strategies, improve efficiency and manage risk.	Exploit small price discrepancies in real-time and very swiftly.

Conclusion

With this, it is quite clear that algorithmic trading or algo trading is a broader category and high-frequency trading is a subset of it. HFT is a more specialised form of algo trading for a large number of trades to be executed at ultra-high speeds and in a short span of time. Platforms like uTrade Algos offer traders a chance to experience algorithmic trading without the hassle of coding.